Why Has Bitcoin Tumbled Almost 50% From Its Peak Last Month? A Few Theories
The value of bitcoin has tumbled 25% in the past week and 46% in the past month. The cryptocurrency's price fell below $10,000 today, down from a peak of almost $20,000 in December. Other cryptocurrencies, such as Ethereum, Ripple and Litecoin, have also precipitously lost value in the past week. What's going on? Here's what you need to know.
A Lot Of People Think This Is The Sound Of A Bubble Bursting
Economists and market analysts have long warned that bitcoin's insane rally in 2017 — rising from $1,000 to almost $20,000 over the course of a year — was the sign of a financial bubble. For them, today's correction looks like the beginning of the end.
Howard Wang of New York-based Convoy Investments and Jeremy Grantham of GMO have analyzed bitcoin's advance relative to past frenzies and concluded that it's unsustainable. Grantham, who helps oversee about $74 billion as GMO's chief investment strategist, summed up his concerns in a Jan. 3 letter to investors:
"Having no clear fundamental value and largely unregulated markets, coupled with a storyline conducive to delusions of grandeur, makes this more than anything we can find in the history books the very essence of a bubble," he wrote.
Officials In South Korea And China Recently Promised To Crack Down On Cryptocurrency Trading
This week's sell-off appeared to be triggered by South Korean finance minister Kim Dong-yeon's statement that "the shutdown of virtual currency exchanges is still one of the options" the government has to regulate cryptocurrency markets. At the same time, Chinese authorities made moves to suppress cryptocurrency trading in China.
Tuesday's decline followed reports that South Korea's finance minister had said banning trading in cryptocurrencies is still an option and that Seoul plans a set of measures to clamp down on the "irrational" cryptocurrency investment craze.
Separately, a senior Chinese central banker said authorities should ban centralized trading of virtual currencies as well as individuals and businesses that provide related services.
[Reuters]
Authorities In Other Countries Have Also Called For Cryptocurrency Regulation
South Korea's and China's promises to regulate cryptocurrency markets come on the heels of murmurs from other countries' finance officials about regulating Bitcoin, and promises to discuss the matter at this year's G20 summit.
In December, France's finance minister called for regulators to debate cryptocurrency regulations at this year's G20 summit, a proposal for which both Italy and Germany expressed support.
Just last week, US Treasury Secretary Steven Mnuchin made similar comments, stating that while US regulators were equipped to combat the use of cryptocurrency in money laundering schemes, other G20 members are not so well-prepared.
The Value Of Bitcoin Also Fell Last January, Thanks In Part To The Lunar New Year
Some market-watchers attribute the slump in part to the forthcoming Lunar New Year, which may have prompted some Asian cryptocurrency holders to sell in order to buy gifts. Last year, the value of Bitcoin fell quite a bit in January, only to rebound by mid-February.
"The January drop is a recurring theme in cryptocurrencies as people celebrating the Chinese New Year, aka Lunar New Year, exchange their crypto for fiat currency," said Alexander Wallin, chief executive officer of trading social network SprinkleBit in New York. "The timing is about four to six weeks before the lunar year, when most people make their travel arrangements and start buying presents."
Bitcoin had a similar decline at the beginning of 2017, when it slumped from a high of $1,162 to a low of $752 in January, similar to what happened in the first month of the prior year.
The Value Of Bitcoin Is Volatile In Part Because Just A Few People Own A Vast Majority Of It
Although the recent fall in bitcoin value has been particularly dramatic, the price of the cryptocurrency has been known to vary widely from day to day, and even hour to hour. This volatility is a result of a consolidated market, where just a few people own a huge chunk of all Bitcoin.
Approximately 40 percent of bitcoin is held by about 1,000 users, and the top 100 bitcoin addresses — some of which may belong to the same person — control about one-sixth of all the issued currency, according to Bloomberg. One reason why bitcoin can fall by 20 percent in a day — which is practically unheard of for most equities, and certainly of most currencies — is that if any one of these huge investors sells, it can move the market. Bitcoin's extraordinary price fluctuation is possible because ownership of nominally decentralized technology is, in fact, quite concentrated.
Experts Say The Bitcoin Crash Is Unlikely To Affect The Stock Market
Although two major financial exchanges began trading Bitcoin-based derivatives last month, Bitcoin futures are still too new for this crash to affect traditional markets.
The consensus for now is that bitcoin is too divorced from the traditional banking system to have any ripples on financial stability, although traders warn that could change in the future as Wall Street seeks to own a bigger slice of the digital payments industry.
"If the trading in the futures had gotten some momentum then you would have a link with the real world," Andrew Brenner, head of international fixed income securities at NatAlliance Securities, told Business Insider.